The Supreme Court of Appeal clarified the scope and independence of on-demand guarantees, underscoring key principles that directly affect guarantors.
The guarantor issued three on-demand performance guarantees in favour of a developer for a large-scale housing project. The underlying construction contracts were cancelled and the guarantor received demands for payment under the performance guarantees. The guarantor disputed the existence and validity of the building contracts and raised several defences, including alleged fraud, mistake and unconscionability.
The Court (i) reiterated that on-demand guarantees function as autonomous instruments, strictly governed by their own language and not by the minutiae of the underlying contracts and (ii) held that the guarantor had no basis to withhold payment once the developer satisfied the straightforward contractual conditions for calling up the guarantees.
For guarantors, the ruling underscores that on-demand guarantees will be enforced if the beneficiary meets the conditions stated in the guarantee, such as alleging contract cancellation due to default and attaching termination notices. Defences like fraud must be clearly proven. Mistake or “non-enforceability” of the underlying contract are not viable defences if the guarantee’s terms are met and there is no fraud. Guarantors should carefully assess risks when underwriting on-demand guarantees, understanding the exposure from their independence.
The judgment solidifies the principle that guarantors must expect to pay promptly on validly invoked on-demand guarantees, save for the narrowest of exceptions. The decision offers valuable insight into the protective nature of these guarantees and reaffirms the minimal defences open to guarantors.