The guarantor must pay on demand

The appeal court has reaffirmed that an undertaking to make payment on receipt of a first written demand under a guarantee (in this case a construction guarantee) must be honoured by the guarantor as an autonomous obligation without question unless a fraud is being committed on it.

An on-demand performance guarantee stands on a similar footing to a letter of credit.  The guarantor is not in the least concerned with the relations between the parties to the contract whose performance is guaranteed.  The guarantor must pay on demand if that is what the guarantee says without proof or conditions (in the absence of clear fraud proved by the guarantor).

Dormell wrong

The court also found that the earlier decision of Dormell Properties v Renasa Insurance is wrong in suggesting that the guarantor can refuse to pay by relying on events that occurred after the demand was made.  The court complained that a number of guarantors have been relying on Dormell to avoid paying on demand, which is the very thing that the law relating to demand guarantees seeks to avoid.

Recent English case

The English Court of Appeal reached a similar conclusion in December 2013.  Where payment was made under an on-demand performance guarantee but there was a subsequent arbitrators’ finding that the money was not due, the payment made on demand was not refundable to the bank.  It is of no relevance to payment under an on-demand guarantee that it is subsequently discovered that the demand, although made in good faith, was in fact made upon an incorrect assumption.

If there is an under-payment or over-payment under the underlying contract, the parties to that contract must account between themselves.