There are only two grounds on which a bank that issues an on-demand guarantee can refuse to pay the amounts guaranteed, namely fraud or if the demand for payment does not comply with the requirements of the guarantee. Otherwise banks are required to honour the obligations they have assumed in terms of demand guarantees issued by them. Any dispute between the parties to any underlying contract is irrelevant.
The most recent case is State Bank of India v Denel.
Absa Bank issued eight counter guarantees for the benefit of Denel to back primary guarantees issued by Indian banks to Denel’s contractual counterparty Union of India (UOI). The aggregate amounts due under the demands was around 3 million dollars. Seven of the guarantees required a demand that Denel had not performed according to the “warranty obligations” under the contract concluded with the UOI. One of those guarantees was governed by Indian law and subject to the exclusive jurisdiction of the courts of India. The eighth guarantee required a demand that the “goods supplied” by Denel were not in accordance “with the contractual obligations”.
The demand for the first seven guarantees was a demand alleging the failure by Denel to comply with its “contractual obligations”. What was required was a demand that Denel had not performed according to its warranty obligations. The demand under the eighth guarantee called for payment because of “non-fulfilment of contractual obligations”. What was required was a notice that the goods supplied were not in accordance with the contractual obligations.
Therefore none of the demands was in the exact terms required by the guarantees themselves. The court found that the demands did not comply with the terms of the counter guarantees. In the absence of compliant demands, Absa was not obliged to make payment to the Indian banks under the counter guarantees.
In the case of the one guarantee governed by Indian law and subject to the jurisdiction of the Indian courts, the South African appeal court refused to prevent Absa Bank from paying the guarantee because that clause constituted a complete ouster of the jurisdiction of a South African court to deal with the question whether or not the demand complied with the terms of the counter guarantee.
Anyone writing a demand under a demand guarantee must follow the exact requirements of the guarantee in the wording of the demand.
